Opening the ark

Animal health carve-ups to come two by two

Animal health is presenting a bit of a feast for the wolves of Wall Street. It's the secret cash cow of the pharma business. Research and development costs are lower, regulatory scrutiny is gentler and growth faster than human care. And shareholder pressure is forcing firms from Novartis to Merck to explore sales, joint ventures and initial public offerings.

Revenues are less than a tenth that of human medicine. But research on human diseases unveiled biological principles and chemical compounds that also cured animals. The resulting profit was largely gravy.

Now, while this tail isn't wagging the dog, it's inducing some wiggling. Sales for the sector are rising around six per cent a year according to Zoetis, which Pfizer spun off in early 2013. That's slightly faster than human drug sales.

There's less pressure from generic firms selling cheap copycat pills, too. Only about a fifth of Zoetis' sales come from drugs with tough patent protection. In addition, research and development   (R&D) costs are lower: Sanofi's animal division spends an amount equal to around 7.5 per cent of sales on investigating and producing new drugs. That's about half what the typical pharmaceutical firm shells out for human medicine.

As a result, Zoetis, Eli Lily and Sanofi have all bought smaller rivals. But it remains a fragmented industry and uppity investors are now putting pressure on big pharma companies to find ways to create value from their sub-scale animal-health units. The 35 per cent increase in Pfizer's stock since announcing it would spin off Zoetis is bolsters their case.

Selling such a division should generate a good dollop of cash for buybacks. Novartis' unit would be worth $5 billion if valued on the 4.5 times trailing sales Zoetis trades at - and Merck's some $15 billion.

Carving these businesses out means losing both sales and some R&D synergies, so some may opt to form a joint venture - though that can be messy and time consuming. Novartis is currently mulling a swap of its business for Merck's consumer assets or perhaps selling the division to a rival such as Bayer.

One thing seems clear: given the bright outlook for animal health, and pharma's relatively dull prospects, only a top price is likely to get current owners to part with their pet business.

Contributed with Neil Unmack